FINANCIAL ACCOUNTING ASSIGNMENT

NAME: ANTARIKSH GOEL

ROLL NO: 23/BMS/73
COURSE: BMS
SUBMITTED TO: MS PARUL MA’AM

Q1. WHAT IS ALTMAN’S SCORE AND HOW IT HELPS IN

PREDICTING FINANCIAL CRISES?
ANS. The Altman Z-score is a financial metric that is used to predict
the likelihood of a company going bankrupt. It was developed by
Edward Altman in 1968 and is based on five financial ratios: working
capital/total assets, retained earnings/total assets, earnings before
interest and taxes/total assets, market value of equity/book value of
total liabilities, and sales/total assets.
These ratios are used to compute the Z-score, which divides
businesses into three groups: safe, grey, and distress. A corporation is
considered safe if its score is more than 2.99; if it is between 1.8 and
2.99, it Is considered to be in the grey area and might be experiencing
financial difficulties. If the company's score is less than 1.8, it is
considered to be in financial hardship and may face bankruptcy.
Using the Z-score, one can forecast financial crises by examining the
financial standing of businesses within a specific sector or geographic
area. For instance, a study on the Oslo Stock Exchange discovered
that while the Z-score could predict bankruptcies prior to the financial
crisis, its predictive power declined during the fourth crisis. The Z-
score should, however, be used in conjunction with other metrics and
analysis as it is not a perfect predictor of financial crises.
Q2. EXPLAIN MEANING, UTILITY AND CONTENTS OF
CORPORATE ANNUAL REPORT.
ANS. A corporate annual report is a comprehensive report that
provides information about a company’s activities throughout the
preceding year. Its purpose is to provide users, such as shareholders or
potential investors, with information about the company’s operations
and financial performance. The report is designed to provide readers
with information about a company’s performance in the preceding
year. The reports contain information, such as performance highlights,
a letter from the CEO, financial information, and objectives and goals
for future years. The structure of annual reports will vary according to
each company, but most annual reports will generally contain the
following:

Letter from the CEO: The letter from the CEO is addressed to
shareholders and provides a summary of the company’s performance
in the previous year. CEOs typically spend a lot of time on their
letters to highlight the company’s achievements, as its performance is
relative to the industry it operates in. The letter would likely mention
the information of interest to shareholders since they are the primary
readers of the report.
Performance Highlights: Annual reports usually dedicate a section
to highlighting some of the company’s key achievements, such as
special initiatives, goals reached, or awards received by the company
or its employees. The main goal of the section is to ensure that
shareholders are satisfied with their investment in the company and
persuade potential investors to do the same.
Financial Statements: Financial statements are a key component of
the annual report and provide its users with quantitative data
regarding specific aspects of its financial performance in the previous
fiscal year. Annual reports typically include financial statements, such
as balance sheets, income statements, and cash flow statements.
The contents of an annual report are designed to provide readers with
information about a company’s performance in the preceding year. It
is important to note that many annual reports are not traditional
reports with large amounts of text; many companies often incorporate
a lot of graphics and images, resulting in a visually appealing
document.

Q3. EXPLAIN TECHNIQUES OF EARNING MANAGEMENTS.

ANS. Earnings management is the use of accounting techniques to
produce financial statements that present an overly positive view of a
company’s business activities and financial position. There are several
techniques used to manage earnings, including:

One-time charges: These are large one-time charges or expenses,

such as writing off costs of a failed project, that are included in the
financial report.
Cookie jar reserves: Companies set reserves in the previous quarter
to use in periods where profits are relatively low.
Revenue and expense recognition: Companies can manipulate the
timing of revenue and expense recognition to improve their financial
statements.
Changing accounting method: Companies can change their
accounting method to generate higher earnings in the short term.
It is important to note that earnings management can be illegal if it
involves fraudulent activities or misrepresentation of financial
statements.

Q4. EXPLAIN “WORKING CAPITAL ANALYSIS” AS A

TECHNIQUE FOR FINANCIAL STATEMENT ANALYSIS.
ANS. Working capital analysis is a technique used in financial
statement analysis to evaluate a company’s liquidity and short-term
financial health. It involves comparing the company’s current assets
to its current liabilities to determine whether it has enough resources
to meet its short-term obligations. The difference between current
assets and current liabilities is known as net working capital. A
positive net working capital indicates that the company has enough
resources to meet its short-term obligations, while a negative net
working capital indicates that the company may face difficulties in
meeting its short-term obligations.
Working capital is important for a company for several reasons:

Liquidity management: Working capital helps businesses manage

their day-to-day operations and make key investment decisions in
such a way that they are never out of cash and don’t face liquidity
issues.
Out of cash: Inappropriate management of day-to-day expenses may
result in enterprise liquidity issues. Therefore, the planned
management of working capital can avoid such a situation.
Helps in decision making: By correctly analyzing the requirement of
funds for day-to-day operations, the finance team can appropriately
manage the funds and can decide on available funds and the needed
funds.
Addition in the value of business: Proper working capital
management results in timely payment to the lenders, which creates
goodwill in the market.
Helps in the situation of cash crunches: By properly managing the
liquid funds, one can help the organization avert any cash crunch and
pay for its day-to-day expenses on a timely basis.
Perfect investments plans: Correctly managing the funds or working
capital, the company can plan for their investments accordingly and
maximize its return.
Helps in earning short-term profits: Some enterprises keep a large
buffer of funds as working capital, which is way over and above the
required level of working capital. By correctly estimating the required
working capital, the extra funds can be invested in other projects that
may result in higher profits.
Strengthening the work culture of the entity: Timely payment of all
day-to-day expenses like the salary of the employees creates a good
environment and motivates employees to work harder.